Sales and Use Tax Annotations

Annotation 335.0089.700

335.0089.700Use of MTE by Lessor. A taxpayer purchases an item of mobile transportation equipment (MTE) for use in California and makes a timely election to pay use tax measured by the fair rental value (FRV) pursuant to subdivision (d) of Revenue and Taxation Code section 6094. After leasing the aircraft for some period of time and reporting tax measured by FRV, the taxpayer makes a use of the MTE other than leasing, i.e., a nonconforming use. Subsequent to the nonconforming use, the taxpayer begins to lease the MTE again. Under such circumstances, it is necessary to determine whether the taxpayer has established that its use of the MTE was sufficiently limited to leasing for purposes of making a valid election to pay tax measured by FRV under the requirements of section 6094(d). If a valid election has been made, it must also be determined whether the taxpayer has established that the taxpayer has stopped leasing the MTE for such a significant amount of time that the taxpayer has substantively changed its use of the MTE, resulting in the abrogation of the election that would otherwise be irrevocable.

In order to make these determinations, the following six-month test periods apply:

1. A taxpayer has established that it has made a valid election to report tax measured by FRV pursuant to section 6094(d) if the taxpayer can demonstrate that it has limited its use of the subject MTE to leasing for at least the first six months of use. If the taxpayer makes a nonconforming use of the MTE at any time (whether during or after this six-month test period), use tax is due measured by the purchase price of the MTE (but offset by the amount of tax previously reported measured by FRV).

2. A taxpayer that has made a valid election to report tax measured by FRV has established that it has stopped leasing the MTE (and thereby substantively changed its use of the MTE) when the taxpayer refrains from leasing the MTE for at least the first six months following the nonconforming use. If a taxpayer satisfies the requirements of this second six-month test, then the taxpayer will owe use tax measured by the purchase price of the MTE (with appropriate offsets). To the extent the taxpayer leases the MTE after the expiration of this second test period, the taxpayer will not be obligated to report tax measured by FRV. 12/30/05. (2007–1).